M&A and the cosy ties between boards and their advisers | USAEMALL.com

One scoop to start: One of the UK’s largest movie technology businesses has been valued at more than $2bn following an Abu Dhabi-backed fundraising that will allow the group to develop new AI tools to create films and games.

Plus, one big sports M&A process: The owners of the Boston Celtics are planning to sell the basketball team, less than a month after the NBA franchise won their league-record 18th national championship. The Celtics are expected to set a record price for an NBA team, having been valued by Forbes at $4.7bn in October.

In today’s newsletter:

The ties that bind

Last week, DD brought you the inside story of the cosy ties between Goldman Sachs and its newest board member, John Hess. The oil tycoon has been a longtime client of the bank and is in the process of completing a sale of his energy business to Chevron, in a deal that will see Goldman potentially reap as much as $80mn in fees from the sale if Hess Corporation completes it. 

Today, we bring you two fresh situations that once again highlight the close relations between companies doing deals and their advisers. And we’d like to hear from you about where you think the lines should be drawn. Writes to us at Due.Diligence@ft.com.

The first involves Boeing, a public company, which on Monday announced an all-stock deal to buy its aviation supplier Spirit AeroSystems that valued its equity at $4.7bn. Boeing is chaired by Steve Mollenkopf, the former longtime CEO of Qualcomm. Mollenkopf is also a senior adviser at Consello, the advisory and investing business set up by Teneo co-founder Declan Kelly. (Recall our coverage of Kelly’s inglorious Teneo exit.)

Consello has already been reported as helping Boeing, which is facing scrutiny due to a series of mishaps, with its search for a new CEO. Boeing said on Monday that Consello was among its advisers on the Spirit deal, alongside lead adviser PJT Partners as well as Goldman. 

Boards have plenty of discretion in which advisers they select, and their comfort with a particular banker or lawyer can be useful in stressful deal negotiations. The question always is whether conflicts of interest are fully disclosed to other directors, and if all sides understand that they first have duties to the ordinary shareholders, not to each other. Consello’s role in the Boeing CEO search and the advisory work raise questions over what sort of disclosures were made to fellow Boeing directors about any potential conflicts.

Boeing said that Mollenkopf’s advisory role with Consello has been called out in the past three proxy statements within his bio “and has been thoroughly reviewed and disclosed”.

Separately on Monday, financial data company Preqin agreed to be sold to asset management giant BlackRock for a staggering price of £2.55bn, or 13 times its expected 2024 revenue of $240mn. Preqin, a private company, is chaired by Bradley Fried, who also happened to be the chair of Goldman Sachs International until April. And, as fate would have it, Goldman Sachs International was the sole adviser to Preqin on its sale.

(Goldman declined to comment while Preqin did not respond to a request for comment.)

The world of dealmaking is big, but sometimes it can seem quite small.

‘We thought there was a capital structure’: how western investors lost billions in China

For much of the past two decades, international investors have been keen to finance one of the world’s most dramatic growth stories: China’s property boom.

But China’s regulators impose strict controls on money moving in and out of the country, especially as debt. So bankers and lawyers used a more creative, if complicated, mechanism to bridge China and the wider world. 

That mechanism, and its implications for the future flow of capital between China and the west, are barely discussed outside specialist circles. DD’s Kaye Wiggins and the FT’s Thomas Hale and Wang Xueqiao took a close look at it in this FT Big Read on China Evergrande.    

Here’s how it worked. Specially created vehicles outside China, often in the British Virgin Islands, would sell bonds to international investors. They would send the proceeds into China as equity investments in subsidiaries. To pay bondholders’ coupons, they relied on equity dividends from those subsidiaries.

The bonds themselves were often issued via Hong Kong, with its westernised legal system and investor protections, and stamped with the logos of some of Wall Street’s biggest banks who had underwritten them. They promised coupons of up to 9.25 per cent, a heady prospect in a low-rate world.

But when things went wrong in China’s property market — beginning when China Evergrande defaulted in 2021, with $20bn of offshore debt in issue — those bonds offered little of the protection that western investors typically associate with debt instruments.

When it defaulted, Evergrande’s offshore bondholders included BlackRock, HSBC and emerging market specialist Ashmore. Those that still had some exposure this year, according to Bloomberg terminal data, included UK insurer Legal & General and US hedge fund Saba Capital Management.

“It will be a very, very low price, like 0.0 something,” one investor said of their firm’s “legacy exposure” to Evergrande. Another described his firm’s holdings in other Chinese developers’ bonds, which he hopes to negotiate some recovery on, as “subordinated equity”, a far more junior entity than a bond secured on real assets. “We thought there was a capital structure in China,” he said. 

“Tourist investors,” or those with little experience of investing in Chinese property groups, had ploughed money into Evergrande’s bonds because it was such a well-known name, said one person involved with the fallout. The person added that some hedge funds “decided, without knowing much, to pile in” when signs of distress emerged.

Advising Chinese developers was a “fee machine” for the banks, said one investor who participated in an Evergrande private placement in the mid-2000s. There were fees from the pre-IPO bonds, the IPO itself, and then high-yield bond issues. 

But any western investor who thought they were buying what they would think of as “a normal bond” was under “an illusion”, this person said. “They were always going to be the part that didn’t get paid.” 

Job moves

• Robey Warshaw, the elite UK boutique advisory firm, has made its second-ever external partner hire by tapping the financial institutions banker and former Aviva executive Chetan Singh from JPMorgan in London. He starts later this year.

• DD exclusive: Goldman Sachs’ Emea co-head of industrials Eduard van Wyk is departing for PJT Partners in London, according to sources close to the matter. Both banks declined to comment.

• Law firm Davis Polk has elected six new partners.

• Jefferies has hired Birger Berendes as continental European head of M&A. He is joining from Bank of America. The bank has also tapped Michael Borch as its Emea and Asia head of transportation and logistics banking. He will join from Citigroup.

• Sebastian James is leaving UK pharmacy retailer Boots to become group CEO at private equity-owned ophthalmology chain Veonet.

Smart reads

Inside Davos The World Economic Forum has faced numerous accusations of sexual harassment and discrimination against women and Black people, The Wall Street Journal reveals, based on interviews with more than 80 current and former employees.

End of an era Faced with a lack of exit options for investments, private equity owners have been forced to reconsider mega takeovers and look to smaller deals instead, the FT reports.

M&A draft Competition between firms trying to poach top Wall Street lawyers favoured by private equity elites is pushing pay ever higher, with bidding wars beginning to resemble the competition among NBA teams to sign star athletes, The New York Times writes.

News round-up

Citi was money launderers’ favourite bank, US law enforcement officials say (FT) 

Is being a multi-CEO more trouble than it’s worth? (FT)

Moelis banker recorded in punching incident charged with assault (FT) 

UK start-ups turn to Silicon Valley to fill void left by risk-averse pension funds (FT) 

Bain’s new boss says consultancy pulling back from work in China (FT)

Morgan Stanley to join Goldman and JPMorgan in scrapping UK bonus cap (FT) 

Temasek on deal hunt to boost returns for Singapore (FT) 

Hong Kong’s exclusive clubs rocked by economic slowdown and expat exodus (FT)